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Stock Market Panic:
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The economy is feeling some strains. Credit and housing woes have clearly deepened, with about a third of the mortgage market effectively shut down. Home sales are drying up, prompting home builders to slash output. They're fearful that even prospective buyers with good credit won't be able to get the loans they need.
In the financial sector, meanwhile, banks are running up against their own liquidity crunch. Their main problem is that the critical interbank market -- money that banks loan to one another -- is drying up because no one wants to accept any mortgage-backed securities as collateral for such loans. Lyle Gramley, former Fed governor and now an adviser with the Stanford Washington Research Group, says, "Investors were irrational before because they bought junk, and they're irrational now because they won't buy quality."
The Federal Reserve's move on the discount rate will provide some help. Cutting the rate it charges banks for short-term loans and extending their repayment period will ease bottlenecks in the banking system. This lowers the odds that the Fed -- and the economy as a whole -- might become embroiled in a crippling crisis such as the failure of a major lender or big investment fund. It also helps to boost investor confidence, as witnessed in the stock market. John Silvia, chief economist with Wachovia Corp., says, "It's good news that the Fed is telling the markets, 'we're here to lend.' "
But the risk of a recession remains. Positive news on housing is the key to avoiding it. Otherwise, an economic slump could end up as a self-fulfilling prophecy, with investors, consumers and companies freezing up as they become increasingly spooked by the housing sector's bad fortunes.
Fundamentally, the economy still has legs. In fact, mortgage and housing woes have largely overshadowed some bullish indicators of late: Exports are coming in even stronger than expected this year. Note that a surprisingly low trade deficit for June, the latest month reported so far, is likely to lead to a hefty upward revision to second-quarter growth in gross domestic product to around 4% from the initial estimate of 3.4%. Figures for July showed consumer spending far from fizzling out, while industrial production was decidedly healthy.
Most businesses also have ready access to credit from banks and other sources. There's little evidence so far of a contagion moving from lenders' mortgage desks to the business-borrowing side of the office. On the contrary, bankers are eager to lend to firms, especially creditworthy small ones, to help offset dwindling mortgage and home-equity loan business.
Even so, business confidence is eroding at a fast clip amid concern that housing and stock market ills may soon choke off consumer spending. Though this doesn't appear to be happening to any great extent, the worry itself is guiding companies' actions. We've recently seen evidence of a pullback in investments, notably by larger firms. Some expansion projects have been placed on the back burner, potentially fraying the economy's essential lifeline: job growth. Claims for unemployment insurance, a weekly barometer of the employment market, have been edging higher in the past few weeks, suggesting that more people are out of work.
Will Washington policymakers do any more to lend support to businesses, banks, the economy and markets? The Fed and politicians have more tools at their disposal: The central bank could lower its benchmark federal funds rate, thereby triggering lower interest rates for a variety of borrowers. This, for example, would ease the payment burden for some mortgage holders and make it cheaper to get certain types of consumer and business loans.
Meanwhile, the White House and Congress could allow Fannie Mae to expand its role in the secondary mortgage market to further prop up lending activity. One option would be to increase the limit on the value of loans that Fannie Mae is allowed to purchase, effectively making it easier for banks to grant so-called jumbo mortgage loans.
But the Washington crowd is walking a policy tightrope between averting a recession on one side and not wanting to bail out investors who took careless risks on the other. No doubt, the Fed and politicians will take more action if absolutely necessary. But the timing and extent of that action will be tricky to decide.
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POSTED BY: JAO (August 20, 2007 07:55 PM)
It seems like the media has made more out of this than is justified. The lenders that are in trouble have created the problem with their promotion of interest-only loans and other means. It is unfortunate that their customers will be hurt and if anything is done to bail someone out, it should be done for these customers. But they should only be bailed out if they agree to be fully educated on how they went in the ditch so they will be less likely to repeat it. Much of the decline has been in areas that were stoked to red-hot because of the above practices and they are now returning to a more normal state. The economy is strong and the media delights in manufacturing "news" by publishing polls "showing" that the general public thinks the sky is falling.
POSTED BY: casting stones (August 20, 2007 10:34 PM)
"...agents, lenders, title..builders... they ALL knew OR SHOULD HAVE KNOWN what they were doing". I was a loan officer for 13 years. I honestly helped people finance homes they could afford... and that doesn't necessarily even mean as much as they qualified for. Most of us do. But to lump everyone in th business together into a giant "fraud" scheme is naive. That's like saying if a person is islamic... they are to blame for 911 because they "should have known"....
There are many good, honest loan officers and others in the industry out of a job now BECAUSE there were some bad LOs, lenders programs and.... loans. I don't know what industry you are in "madmilker", but be careful before you so forcefully throw those stones.
POSTED BY: Chipster (August 24, 2007 12:05 PM)
What woods? The economy is doing fine, the deficit is on its way down, tax collections are up and employment is raging. Yes, there is a shake out in subprime market as it should be. This too will pass. So get off the negative side and get on the positive side.
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